David Hunter, consultant, Bates Wells & Braithwaite LLP:
The financial challenges facing the public sector are huge, but they are not straightforward. Not only is there pressure to reduce expenditure immediately, but the combination of demographics and the economic outlook means there is a need also to procure more longer term solutions, if the picture is not to get steadily worse.
This post looks at the role that commissioning for outcomes can play in meeting these challenges and how social impact bonds may be used to finance new approaches to the delivery of public services, without the public sector bearing the risk attached to such innovation.
Prevention better than cure: but difficult to commission
The argument that it would be more effective to procure preventative services, rather than paying the cost of dealing with social problems once they have arisen, has long had widespread theoretical acceptance. However, commissioning for outcomes can be challenging, not least because:
- It can be difficult to establish the outcomes with sufficient clarity so that success can be objectively measured, particularly for certain services with less obvious success factors, and especially over a short commissioning cycle.
- It demands a different approach to commissioning, more arm’s length than such bodies may be accustomed to, in which it is the provider, rather than the commissioner, who determines the model of service delivery that will deliver the outcomes.
- It may involve procuring a service that delivers benefits to other local public authorities and requires engagement with them to explore how that may be reflected, both financially and operationally.
Social impact bonds: allocating the financial risk
Social Impact Bonds do not address the practical difficulties of commissioning for outcomes. However, they do create the opportunity for experienced service providers (often charities or social enterprises) to address intractable social issues through new models of service provision, without the public sector taking the risk on whether it will work. In this model, social investors pay the service provider in the short term and take the risk that, if the service provider successfully delivers the intended outcomes, the payments from the commissioner on delivery of the outcomes will provide them with a financial return on their investment. This is in addition to the satisfaction of seeing the public benefit delivered by the achievement of the outcomes. It has been implemented to date on projects dealing with reducing reoffending, homelessness and keeping children out of care and the government is, not surprisingly, keen to see its adoption on a much wider basis.
Other steps to encourage outcomes-focused commissioning
With the social impact bond addressing, to a large degree, the problem of financial risk, the government is taking others steps to make it easier for public authorities to embrace new commissioning models. A key feature of commissioning social outcomes is that if such projects are successful, the benefits are likely to be felt by a number of public agencies, rather than solely the one commissioning the outcomes. In recognition of this, the Cabinet Office has created the Social Outcomes Fund to offer financial incentives to public bodies who commission outcomes where a significant element of the social benefit may translate into savings for other agencies.
The Cabinet Office has also set up a Centre of Excellence to offer support to public authorities seeking to commission social outcomes. One product of this will be a template contract for use by such authorities. This is currently close to release following a consultation exercise with those organisations that have experience already of such agreements. Inevitably, this will require some adaptation to reflect the specifics of individual projects. However, it does mean that authorities should be able to focus on the critical (and difficult) elements – such as how to establish suitable metrics to measure success and how to allocate risk around payments – without having to draft and negotiate every contractual clause every time. A push for transparency and information sharing means a body of know how is emerging around these critical elements, whilst several organisations have sprung up offering measurement tools for social outcomes.
This drive to align commissioning across sectors is echoed in recent legislation, such as the Health and Social Care Act 2012, which introduced sweeping reforms to the NHS, including obligations for NHS and local authorities to work in an integrated way to meet patient and service user needs. Under the Public Services (Social Value) Act 2012 public authorities are also now required to consider how new contracts can improve the economic, social and environmental well-being of their relevant area as a whole. Commissioners must therefore think more widely about the potential benefits that may arise from what is to be commissioned and capture them right at the outset.
The Payment for Outcomes spectrum
Of course, such initiatives never happen in isolation. There is overlap between the idea behind these contracts – that the public authority identifies the outcome that it wishes to see delivered and commits to paying well for it if it is achieved (for example, the spread on the Peterborough social impact bond, a project aimed at reducing reoffending, goes from nothing if the contract fails to a capped maximum 13% return for investors) – and the more familiar payment by results models.
Payments for outcomes contracts can be regarded as sitting somewhere on a spectrum. This has social impact bonds and commissioning for outcomes at one end, where very innovative services are commissioned; all payments are dependent upon the outcomes achieved; and the service provision is funded in the first instance by third party investors seeking combined social and financial returns, and the more prescriptive payment by results models at the other.
Choosing the right approach and implementing it is a significant task and in particular demands serious engagement with relevant stakeholders before the procurement process has commenced. However, while the challenges around commissioning and contracting for outcomes may seem daunting, the prizes can be significant, with benefits that flow beyond the contract itself. For example, if the Peterborough scheme successfully reduces recidivism, there are not simply financial savings both for the Justice sector, but social benefits for the service users and the communities they live in. There is also a template that is proven and which may then be commissioned on a less speculative basis in future.
Coming soon
Over the coming weeks, we will look at some of these challenges in more detail with further posts on:
- Considerations around commissioning for outcomes.
- Contractual issues in payment for outcomes agreements.
These will be followed on 4 July, by an event run by BWB and Practical Law, which will combine an examination of specific legal issues with the experiences of some of the organisations that have delivered such contracts to date.